Trump Spells Trouble for Eastern Europe

Summary:
In his first week in office President Donald Trump created plenty of anxiety in other countries. Mexico was the initial casualty of his announced policy shift towards tariffs on foreign goods, but several other countries, from Germany to Vietnam, were named on his "watch" list because of their trade surpluses with the United States. Eastern Europe is missing so far from this list, but the region will suffer the effects of Trump’s new policies in at least three ways.
First, Trump has called on other NATO members to up their military expenditures to the prescribed 2 percent of GDP threshold. Currently, only Estonia and Poland meet this level. The average military expenditure for Eastern Europe was 1.2 percent of GDP in 2016, with Bulgaria and Romania at 1.4 percent, the Czech Republic at 1.2

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In his first week in office President Donald Trump created plenty of anxiety in other countries. Mexico was the initial casualty of his announced policy shift towards tariffs on foreign goods, but several other countries, from Germany to Vietnam, were named on his "watch" list because of their trade surpluses with the United States. Eastern Europe is missing so far from this list, but the region will suffer the effects of Trump’s new policies in at least three ways.

First, Trump has called on other NATO members to up their military expenditures to the prescribed 2 percent of GDP threshold. Currently, only Estonia and Poland meet this level. The average military expenditure for Eastern Europe was 1.2 percent of GDP in 2016, with Bulgaria and Romania at 1.4 percent, the Czech Republic at 1.2 percent, and Croatia, Hungary, Latvia, Lithuania, Slovakia, and Slovenia all around 1 percent.1 Upping defense spending would mean strained government budgets and less money for social development. This is especially true in countries with low taxation, for example Bulgaria and Slovakia, where the fiscal model was developed over the past two decades on the premise of stagnant expenditures for the military and the police.

Second, the threat of imposing a 35 percent import tariff on German cars ("buy Chevrolets") would directly affect the economies of the region, which is the biggest supplier of car parts to Audi, BMW, and Mercedes-Benz.2 Cars and car parts constitute 25 percent of Slovakia's total exports, a fifth of the Czech Republic's and Hungary's exports, and about 10 percent of exports in Slovenia, Poland, and Romania. Even Bulgaria’s exports constitute 7 percent car parts, almost exclusively for German manufacturers. A tariff on German cars will have a ripple effect on production in the region.

Third, the introduction of visa-free entry into the United States for citizens of Bulgaria, Croatia, Poland, and Romania will probably have to wait. This discriminatory treatment—all other EU citizens bar Cypriots have visa-free entry already—was subject to intense negotiations last year, with significant progress made. In a coordinated development, Canada announced the removal of visas for all remaining East European countries starting December 2017. The anti-immigration rhetoric of President Trump makes it unlikely that the new US administration will follow through. The visa requirements limit the opportunity for East European companies to pursue business with American counterparts.

Not all expectations are negative. Some East European exporters, particularly in agriculture, may cheer President Trump's comments on reducing or eliminating economic sanctions on Russia.3 Such a policy reversal will likely be followed by the European Union, allowing Bulgarian, Slovak, Polish, and Latvian agribusiness to re-enter the Russian market. These exporters were not adequately compensated for the loss of their traditional Russian market, despite such promises by Brussels. Re-opening exports will be a welcomed respite.

East European politicians have met Trump’s ascension with calmness. This is because Eastern Europe has already had a taste of the mixture of populism, foreign company bashing, and anti-immigration sentiment that President Trump has brought to American politics. Perhaps more so than in any other region, politicians in Eastern Europe have used the same inflammatory rhetoric in the aftermath of the euro area crisis. Viktor Orban rose to prominence in 2010 precisely with this lethal combination and has led Hungary towards a new model of "illiberal democracy."4 Poland’s Jarosław Kaczyński, Slovakia's Robert Fico, and Bulgaria's Boyko Borisov are lesser examples of the same illiberal trend.

As in the United States, the rise of illiberal democrats to political power in Eastern Europe has to do with the dissatisfaction by a large part of the population with the rising inequality of economic opportunity after the fall of the Berlin Wall. In this sense, Eastern Europe invented Trumpism before President Trump came to power. Now it may bear the consequences.

Simeon Djankov, nonresident senior fellow at the Peterson Institute for International Economics, was deputy prime minister and minister of finance of Bulgaria from 2009 to 2013. In this capacity, he represented his country at the Ecofin meetings of finance ministers in Brussels. Prior to his cabinet appointment, Djankov was chief economist of the finance and private sector vice presidency of the World Bank.